CIF Stock Recommendation Report (Fall 2012)

Transcription

1 Section (A) Summary CIF Stock Recommendation Report (Fall 2012) Company Name and Ticker: Boeing BA Recommendation Buy: Yes Target Price: $83.00 Sector: Industrials Industry: Aerospace & Defense Market Cap (in Billions): 53.2 Date: Oct 12 th 2012 Analyst Name: Tung Linh Stop-Loss Price: $63.00 # of Shrs. O/S (in Millions): 7, Current Price: WK Hi: WK Low: EBO Valuation: Morningstar (MS) Fair Value Est.: MS FV Uncertainty: High MS Consider Buying: MS Consider Selling: EPS (TTM): 5.79 EPS (FY1): 4.73 EPS (FY2): 5.61 MS Star Rating: Next Fiscal Yr. End: 2012 December Last Fiscal Qtr. End: Less Than 8 WK: If Less Than 8 WK, next Earnings Ann. Date: Analyst Consensus Recommendation: 1.76 Yes Oct 24 th 2012 Forward P/E: 11.8 Mean LT Growth: PEG: 1.4 Beta: 1.23 % Inst. Ownership: Inst. Ownership- Net Buy: Yes Short Interest Ratio: 1.7 Short as % of Float: 1.4 Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) Dividend Yield Total Debt/Equity (MRQ) Net Profit Margin (TTM) ROA (TTM) ROE (TTM)

2 Investment Thesis With a backlog of $374 billion, increase demand in commercial airline, a recent US Air Force contract will give Boeing strong revenue in the future. Historical and futures estimates trend upward. High analysts recommendation gives more confidence in Boeing stock. Summary Company Profile: A well-known commercial airplane and military manufacturer. Fundamental Valuation: With chosen above normal growth period chosen of 11 years, EBO valuation is $ Relative Valuation: Similar to competitors. Best indicated ratios: P/E, PEG, and P/CF. Revenue and Earnings Estimates: High historical and future estimates. Mostly positive surprises. Upward trend. Analyst Recommendations: About 82% of analysts choose Buy or Outperform recommendation. Institutional Ownership: 1143 holders with 72.68% shares. Only little change in ownership. Short Interest: Short % to Float: 1.4% (as of Sep 28, 2012). Stock Price Chart: More volatile than the S&P500 index but more stable than the industrial sector index. 2

3 Section (B) Company Profile Company Summary Boeing is a multinational aerospace and defense corporation. The company was founded in 1916 by William E. Boeing. Its headquarters was in Seattle, Washington until they moved to Chicago, Illinois in The company includes several different units: Boeing Commercial Airplanes; Boeing Defense, Space & Security; Engineering, Operations & Technology; Boeing Capital; and Boeing Shared Services Group. The firm generated $69 billion in sales and had 171,700 employees in Business Model, Competition, Environment and Strategy cycle. The Boeing stock is cyclical. It means that the stock rises and falls with the business After acquiring McDonnell Douglas in 1997, Boeing competes with Airbus in commercial aviation, and Lockheed Martin, Northrop Grumman, and General Dynamics in defense operations. Sales are approximately split 50/50 between the airplane and defense portions. Boeing has a $374 billion backlog ($300 billion in commercial and $74 billion in defense) which provides a strong revenue guarantee in the future. The company also won the US Air Force refueling taker project (KC-46A) and the contract is worth about $34.8 billion. Boeing s defense business is likely to decrease. Their biggest customer the US Department of Defense is facing the pressure of budget cutting because of budget deficits. According to Morningstar Direct analysis, air travel has consistently grown 1.5% faster than GDP. With globalization and emerging economies, increasing in air travel leads to growing in airplane demand. As airlines look to replace their existing fleet with better and more cost efficient aircraft, Boeing is probably has a strong revenue growth in the short run. Revenue and Earnings History REVENUE Periods March June September

4 December Note: Units in Millions of U.S. Dollars EARNINGS PER SHARE Periods March June September December Note: Units in U.S. Dollars The annual revenue of Boeing was 64.3 billion in 2010 and 68.7 in With an increase in demand, the revenue of the company continues to grow. From historical data, we can see that Boeing s revenue has been increasing. The annual earnings per share of Boeing was 4.45 in 2010 and 5.32 in Based on the figures, earnings of Boeing have been growing over the observed period. 4

5 Section (C) Fundamental Valuation (EBO) BA PARAMETERS FY1 FY2 Ltg 5 EPS Forecasts % Book value /share (last fye ) 4.72 Discount Rate 11.11% Divide nd Payout Ratio (POR 29.73% Ne xt Fsc Ye ar e nd 2012 Curre nt Fsc Mth (1 to 12) 10 Targe t ROE (industry avg.) 24.14% Ye ar Long-term EPS Growth Rate (Ltg) Forecasted EPS Beg. of year BV/Shr Implied ROE ROE (Beg. ROE, from EPS forecasts) Abnormal ROE (ROE-k) growth rate for B (1-POR)*(ROEt-1) Compounded growth growth*aroe required rate (k) Compound discount rate div. payout rate (k) Add to P/B PV(growth*AROE) Cum P/B Add: Perpetuity beyond current yr (Assume this yr's AROE forever) Total P/B (P/B if we stop est. this period) Implied price Che ck: Beg. BV/Shr Implied EPS Implied EPS growth Inputs EPS forecasts (FY1 & FY2): 4.73 and 5.61 Long-term growth rate: 10.51% Book value /share (along with book value and number of shares outstanding): Book value: 3,515,000,000 # of shares outstanding: 744,710,000 Book value / share: 4.72 Dividend payout ratio: 29.73% Next fiscal year end: 2012 Current fiscal month: 10 Target ROE: 24.14% Output Above normal growth period chosen: 11 years EBO valuation: $

6 Sensitivity Analysis EBO valuation would be: $73.54 if changing above normal growth period to 12 years $86.65 if changing growth rate from mean (consensus) to the highest estimate 16.00% $59.02 if changing growth rate from mean (consensus) to the lowest estimate 5.10% $62.42 if changing discount rate to 12% $72.68 if changing target ROE to 25% 6

7 Section (D) Relative Valuation BA Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value P/S P/CF Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio TTM TTM 1 HON Honeywell Internationa $ 47, $ $ % % LMT Lockheed Martin Corp $ 30, $ $ % % EADSY European Aeronautic De $ 29, $ $ % % RR Rolls-Royce Holdings PL $ 26, $ 1, $ % % BA Boeing $ 52, $ $ % % Implied Price based on: P/E PEG P/B Value P/S P/CF 1 HON Honeywell International, Inc. $67.65 $56.29 $30.48 $ $ $ LMT Lockheed Martin Corp $62.15 $91.48 $ $ $64.67 $ EADSY European Aeronautic Defence and Space NV $77.92 $27.50 $22.94 $ $45.17 $ RR Rolls-Royce Holdings PLC $ $ $23.32 $ $ $79.29 High $ $ $ $ $ $ Low $62.15 $27.50 $22.94 $ $45.17 $60.58 Median $72.78 $73.88 $26.90 $ $96.49 $71.72 From the top panel With an exception of Rolls-Royce, the forward P/E of Boeing is similar to the rest of the competitors. So the stock is not considered to be more expensive than the others in the industry. If we look at PEG ratio, we can see that Boeing is showed to be slightly overvalued, but still in the same range with the rest. PEG of Rolls-Royce is much higher, which means that the stock is highly overvalued. This can be explained by the high P/E by the market. The P/B (MRQ) of Boeing is at the lower end compare to others. I don t think this ratio is appropriate to evaluate Boeing since the book value does not include intangible assets such as intellectual property and brands. The P/S (TTM) of Boeing is in at the middle level compare to its competitors, and it s also less than 1. By comparing P/CF(TTM) of these companies, we can see that Boeing is line with others. From the bottom panel The implied prices derived from competitors vary from $22.94 to $ The medians of forward P/E, PEG, and P/CF seem to have the closest value to the actual price. In my opinion, these three ratios are probably the most relevant as a valuation tool for Boeing s stock. The P/B (MRQ) gives the smallest range of implied price and the Value ratio gives the highest of implied price. As discussed earlier, P/B isn t a good indicator for Boeing. 7

8 Section (E) Revenue and Earnings Estimates HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Jun-12 19, , Quarter Ending Mar-12 18, , , Quarter Ending Dec-11 19, , Quarter Ending Sep-11 17, , Quarter Ending Jun-11 16, , Earnings (per share) Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun For sales, Boeing has a pattern of positive surprises the market with number different from analysts estimates. The surprises were small in 2011 but they were bigger in the first two quarters of The only exception was the third quarter of 2011 where Boeing s sales were less than estimate 0.55%. For earnings per share, the company also has a pattern of positive surprises the market but with a much higher difference from analysts estimates. The average surprise percentage was 26.94% for the last five quarters. 8

9 CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Dec , , , , Quarter Ending Mar , , , Year Ending Dec , , , , Year Ending Dec , , , , Earnings (per share) Quarter Ending Dec Quarter Ending Mar Year Ending Dec Year Ending Dec LT Growth Rate (%) Revenue Difference from High Difference from Low Quarter Ending Dec % 6.79% Quarter Ending Mar % 4.15% Year Ending Dec % 2.82% Year Ending Dec % 5.65% Earnings Difference from High Difference from Low Quarter Ending Dec % 14.16% Quarter Ending Mar % 12.50% Year Ending Dec % 4.23% Year Ending Dec % 9.09% 9

10 For revenue, the divergent are more notable for the current, out-quarter, and the FY1. For earnings, the divergent are more notable for the current quarter and exceptional high for the percentage difference of the High estimate from the consensus of FY2. The number of analysts providing LT growth rate estimate are 10, which is only about one-half the average number of analysts providing revenue and earnings estimates. CONSENSUS ESTIMATES TREND Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago SALES (in millions) Quarter Ending Dec-12 21, , , , , Quarter Ending Mar-13 20, , , , Year Ending Dec-12 80, , , , , Year Ending Dec-13 87, , , , , Earnings (per share) Quarter Ending Dec Quarter Ending Mar Quarter Ending Dec Quarter Ending Dec For revenue, the consensuses of analysts estimates are trending up. We can see that the analysts are more positive about Boeing s sales. For earnings, the consensuses of analysts estimates are trending down. The analysts were more positive about Boeing s earnings one year ago than recently. 10

11 ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Dec Quarter Ending Mar Year Ending Dec Year Ending Dec Earnings Quarter Ending Dec Quarter Ending Mar Year Ending Dec Year Ending Dec For revenue, there are 3 up revisions and 8 down revisions in the last week. There are 10 up revisions and 15 down revisions in the last four weeks. We can see that there are more down revisions for revenue. For earnings, there are 3 up revisions and 4 down revisions in the last week. There are 4 up revisions and 10 down revisions in the last four weeks. There are more down revisions for earnings. 11

12 Section (F) Analysts Recommendations ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating There is no notable change of analyst opinions. Over the past 3 months, there are only two recommendation changes. The company receives four different ratings of five possible ones over the observed period. Roughly 82% of analysts choose Buy or Outperform recommendation. The current mean rating is 1.76 and hasn t changed much. We can see that the majority of the analysts think that Boeing stock is a good investment. This is consistent to comments in Morningstar analyst s research report that I have read. 12

13 Section (G) Institutional Ownership BA Ownership Activity # of Holders % Beg. Holders Shares % Shares Shares Outstanding 7,518,156, % # of Holders/Tot Shares Held 1, % 5,464,196, % # New Positions % # Closed Positions % # Increased Positions % # Decreased Positions % Beg. Total Inst. Positions 1, % 5,463,752, % # Net Buyers/3 Mo. Net Chg % 443, % Ownership Information % Outstanding Top 10 Institutions % Ownership 38.20% Mutual Fund % Ownership 0.62% Float % 99.00% > 5% Ownership Holder Name % Outstanding Report Date Evercore Trust Company, N.A /30/2012 Capital World Investors 7 6/30/2012 The numbers of institutions are pretty high. The number of net buyers has been decreasing but it s not significant. There are only two holders with more than 5% ownership. 13

14 Section (H) Short Interest Settlement Date Short Interest Average Daily Shares Volume # of Days to cover 9/28/2012 8,624,546 5,822, /14/ ,384,806 4,984, /31/2012 9,346,858 3,875, /15/2012 9,085,873 3,572, /31/2012 9,600,266 4,099, /13/2012 8,728,473 4,198, /29/2012 8,437,609 3,496, /15/ ,358,629 4,862, /31/ ,324,560 4,506, /15/2012 9,515,359 3,502, /30/2012 8,291,888 4,728, /13/2012 7,301,897 3,652, /30/2012 7,105,170 3,878, /15/2012 8,382,573 4,270, /29/2012 9,834,342 4,319, /15/2012 9,653,895 4,133, /31/ ,001,773 5,425, /13/ ,862,108 4,901, /30/ ,206,455 4,340, /15/ ,929,367 6,651, /30/ ,739,373 5,757, /15/ ,544,773 5,185, /31/ ,794,182 6,768, /14/ ,526,983 5,303,

15 Out of the four competitors, information about short interest of European Aeronautic Defense and Space and Rolls-Royce Holdings is not available. Short interest of Lockheed Martin Corp is trending downward like Boeing but with a higher range. On the other hand, short interest of Honeywell International is trending upward. Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 4,277,030 3,315, M M Shares Short Short Ratio Short % of Float Shares Short (as of Sep 28, 2012) (as of Sep 28, 2012) (as of Sep 28, 2012) (2 weeks prior) 8.62M % 10.38M The amount of shares short decreased about 20% as of Sep 28, 2012 compare to two weeks prior. The percentage of short compare to float is every small. Therefore, I believe that the market is turning more bullish about Boeing stock. 15

16 Section (I) Stock Charts A three months price chart A one year price chart 16

17 A five year price chart Looking at the graphs, we can see that Boeing stock is moving with both the sector index and S&P500 index. Since the stock is cyclical, it s more volatile with the business cycle than the S&P500. Boeing behaves similarly to the sector index. It underperformed the sector when the trend was downward; and it outperformed the sector when the trend was upward. Compare with Honeywell International and Lockheed Martin Corp, Boeing stock performs in the same way but more stable. References